According to a press release, millions have been forfeited to the United States Government in connection with the prosecution of Ross William Ulbricht, the alleged owner and operator of the Silk Road website. This isn’t the first time Silk Road is making headlines – just a few weeks ago we wrote about the indictment of three other individuals that were allegedly involved in the conspiracy to launder money using the site, and before that came the indictment against Ulbricht himself.

The most recent forfeiture is a result of the civil forfeiture proceeding against Silk Road, filed at the same time Ulbricht was indicted. The funds were initially seized from the Silk Road server, and subsequently the forfeiture order was signed on January 15, 2014, by U.S. District Judge J. Paul Oetken. The amount of Bitcoins forfeited is 29,655, which translates to approximately $28 million USD. There are also 144,356 Bitcoins on computer hardware belonging to Ulbricht, which is estimated at $130 million USD. Ulbricht has filed a claim to the funds in the civil forfeiture proceeding contesting the forfeiture.

Bitcoin is a decentralized form of virtual currency. The United States’ currency system is highly regulated; thus, it is no surprise that the U.S. government would be so concerned with a form of currency which more or less avoids the regulatory framework. However, using Bitcoin is not in and of itself unlawful. Nevertheless, users and transmitters must be mindful of using Bitcoin to avoid unlawful transactions.

For example, money service businesses (MSBs) are subject to state and federal regulations. The Financial Crimes Enforcement Network, or FinCEN, is a branch of the U.S. Treasury Department that has been tasked with the oversight of MSBs. FinCEN reports directly to the Office of Terrorism and Financial Intelligence at Treasury. If deemed an operator of a money service business, which is defined to include anyone dealing in currency transactions, an MSB must register with FinCEN and perform certain reporting requirements in order to comply with the Bank Secrecy Act (BSA). While in many cases failure to comply with such requirements can result in civil fines, FinCEN can also refer an MSB to the Department of Justice for criminal proceedings if the circumstances warrant as such.

One specific requirement imposed upon MSBs is establishing an anti-money laundering program. MSBs are also accountable for filing Suspicious Activity Reports in transactions that are over $2,000 and appear to be unlawful or evading the reporting requirements. It is through the registration process and these other types of mechanisms that U.S. authorities are relying upon to regulate and monitor virtual currency systems such as Bitcoin, especially as they increase in popularity.

Indeed, in March of 2013 FinCEN published guidance regarding virtual currency systems. The guidance identifies who is considered an MSB in the context of virtual currency transactions. In other words, FinCEN was warning those engaged in such transactions that they are now subject to FinCEN registration and reporting requirements. A few months later, FinCEN designated Liberty Reserve, another virtual currency system, as a money laundering concern pursuant to section 311 of the BSA. Although FinCEN has not yet similarly identified Bitcoin as a money laundering concern, it is certainly within their discretion to do so. As Jennifer Shasky Calvery, Director of FinCEN made clear last June, it is in the best interest of those dealing in virtual currencies to adhere to financial regulations. Failure to do so may result in civil fines, forfeitures, and even criminal charges for money laundering like Ulbricht.

What is even more interesting about the FinCEN guidance is that it distinguishes between “real” currency and “virtual” currency. The BSA regulates real currency, whereas virtual currency does not have legal tender in any jurisdiction. Thus, FinCEN’s guidance only regulates “convertible” virtual currency that either has an equivalent value in real currency, or acts as a substitute for real currency. I would assume that the millions subject to forfeiture in the Silk Road case can actually be converted to real currency, otherwise it would appear that the U.S. just came into nothing more than just a lot of Bitcoins.

The author of this blog is Margaret S. Ververis, an attorney specializing in Federal Criminal Defense matters with the law firm of Ferrari & Associates, PC. If you have any questions please contact her at 202-440-2581 or ververis@ferrariassociatespc.com.

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